Supply chain problems are forcing rethinking of business operations
Business owners worldwide, exposed to supply chain problems, to shortages caused by shipping bottlenecks and other pandemic disruptions, are having to rethink their operations. Should you be doing this? While a recent survey of companies shows 93% intended to make their supply chains more flexible, agile, and resilient, only 15% had done anything about it.
Are these laggards not aware that procrastination is the thief of time, that the road to hell is paved with good intentions?
If your business has yet to suffer a supply chain issue, beware complacency. A supply chain tends to be like a car, in that if it’s running well, you tend not to give much thought to it – until suddenly it’s not running well.
For decades businesses have selected suppliers – and all too often, just a single supplier – based on cost and the supplier’s ability to fulfil orders promptly, thus enabling the business operator to keep inventory to a minimum. Business owners have traditionally signed supply contracts that could be adjusted quickly to meet changes in demand.
Which was fine, until suppliers, striving to increase efficiency, began moving production to low wage locations, consolidating orders to maximise economies of scale, selling as much product as possible locally by rebranding to suit regions -- and wherever possible minimising their presence in high tax jurisdictions.
What can you do about this?
Many of the operating models Macks Advisory sees fractured today were cemented in place 20 years ago and made sense then. They don’t now.
While not necessarily needing to be abandoned, these operating models, because pre-pandemic they were focused on cost rather than risk avoidance, should now at least be re-modelled with built-in resilience.
Is it viable for you to increase inventory for your company by signing into longer term contracts with key suppliers? We hear of companies diversifying manufacturing to create regional hubs with local suppliers and acquiring technology that can warn them of potential bottlenecks.
Have you thought of looking to work with other companies, even a competitor, to share information and develop emergency backup facilities? Anything that maximises use of working capital is good business management.
As one analyst told us recently: “Expect to see savvy business operators moving away from running a just-in-time inventory to one that can function as a just-in-case one.”
Under the catastrophic influence of the pandemic, so much of everything shut down, including manufacturers. As business operations became more difficult because of supply chain disruptions, it was obvious just-in time-inventories could no longer function – especially when 73% of companies globally were trying to overcome survival-threatening product shortages and shipping delays.
The lesson of recent history
About 55% of those companies that have survived these hazards have done so by discovering more than one supplier of raw materials, and/or establishing partnerships with other companies in the same industry, concurrently with extensively extending the length of contracts.
Just over 60% of survivors have increased inventories, scrapped previous attempts at restocking with a just-in-time approach, and opted instead for a bigger risk-averse, just-in-case system.
Even where warehouse costs have risen -- and in some instances available space has reached historic lows -- accommodating the cost of long-game operational changes to establish larger and more sustainable inventories, is proving to be good business.
Macks Advisory has seen no figures on warehouse availability in Australia, but we’re informed US industrial vacancy rates -- a measure warehouse availability – are around a national all-time low of 3.6%, property agent Cushman & Wakefield predicts the UK could run out of warehouse space within 12 months, and SA agents report a current unprecedented local demand for commercial/industrial real estate.
Immediately before Covid chaos engulfed the world, “efficiency above all else” was a catch cry of businesses that’s now being drowned out by operators’ mantra “we must survive at all costs”.
Even businesses -- irrespective of size -- that had transferred production to low-cost countries, were caught unprepared by last year’s pandemic shutdowns and shipping bottlenecks, as they struggled to stay afloat by creating local for local supply chains.
How things have changed for ever
Increasing numbers of manufacturers are looking to produce products locally for reasons other than those forced upon them by evolving covid chaos – heightening tensions with China, for example.
Because things produced, not only there but in other low-cost countries, are taking ever-increasing lengths of unpredictable time to reach overseas destinations, there is a trend by international buyers towards building manufacturing facilities in their own countries.
It’s happening in Australia, and it may well be that you and/or business owners with whom you’re associated, should be looking at the long-term economics of this.
For its certain low-cost foreign suppliers will no longer be essential for the survival of many Australian businesses, that business operations have changed for ever in many instances. If there are business analysts who say China can once again become the low-cost global manufacturing it was, then we at Macks Advisory don’t know of any.
Expect to see a rapidly increasing number of high-tech manufacturers in Australia in the foreseeable future – provided they feel they can accommodate what is a ground-breaking deal on corporate taxes that became law towards the end of last year.
This requires manufacturers to pay at least a 15% effective tax rate and to declare profits -- but then prevailing tax regulations can always be adjusted by governments who are particularly keen to see factories set up in their countries.
Of course, there’s a pressing need for the skilled workers to do the manufacturing.
But that’s another issue for another article.
